The severe anti-incumbency towards the end of Congress-led UPA regime had set the stage for a savior to arrive. Stalled projects, corruption charges, sorry state of the economy and an inherent distrust among the people in his leading political opponent played a key role in Mr. Modi ultimately becoming a beneficiary of the TINA-factor and won him elections. Clad in sartorial bandhgala-suits and colorful turbans with promises of Ram Mandir and 10 million jobs, there he was, welcomed by an entire nation struggling with unemployment, price rise and graft. With Prime Minister Narendra Modi completing four years in office, and as we race towards the 2019 Lok Sabha elections, a verdict on his administration is much awaited. Fringe media reports and bhakt-rants aside, let’s reflect as objectively as possible at the economic state of our country, and the efforts taken by this government to bring back ache din.
Towards the end of UPA-II’s administration, average inflation in 2013 was an astounding 10.92%. When the NDA came to power in 2014, this was clearly one of their major challenges. Incidentally, it received a welcome bonus in the form of petroleum prices. International factors had led to a drastic decrease in crude oil prices and continued to range between $30 and $46 for the next 2 years. However, excise duty was increased nine times between Nov 2014 and Jan 2016 and prices were reduced only once in Oct 2017. By essentially making money out of this, the government was able to bring down the inflation to 6.37% in 2014. This was a significant accomplishment of the NDA government, considering the rupee had crashed in 2013. Another noteworthy achievement has come in the form of FDI, as foreign inflows reached a record high average of $55.6 billion per annum in the last four years. Evidently a testament to the prime minister’s initiatives to improve foreign relations and strength border security, India became one of the top investment destinations in the world. India also made a huge leap of 30 positions to reach 100 in 2017 in the World Bank’s – Ease of Doing Business Index 2018; attributed to improvements in starting a business, getting construction permits, credit, and electricity among others. However, despite the government’s efforts to encourage businesses by easing regulations (Insolvency and Bankruptcy Code, 2016), domestic investments and exports seem to have taken a hit, evidently due to the serious debt problems inherited from the previous administration. The way forward is still unclear. It also remains to be seen, how long it takes for these measures to trickle down at state level where problems with respect to obtaining licences, high transaction costs, difficulties in acquiring land and dated labor laws still exist.
Numbers don’t lie. Or do they? In February 2015, the Ministry of Statistics and Programme introduced a two-fold revision in GDP calculation. Firstly, the base year was modified from 2004-05 to 2011-12. Secondly, the formula used for the calculations was revised. This raised a few eyebrows and gave the opposition a lot to talk. However, this is not the first time that a country has tried to perfect its GDP estimates in order to get more comprehensive data and be more in line with global practices. In 2010, Ghana reported a 60% jump in its estimates and in 2014; Nigeria recorded an 89% increase in its estimates overtaking South Africa to become Africa’s biggest economy. The new method relies on a more holistic approach by considering the market prices of commodities instead of their production costs. More importantly, it takes into account the unorganized sector, giving a better picture of our economy. As a result, data showed a sudden boom in the Indian economy and in 2015 and 2018, India surpassed China to become the world’s fastest growing economy among the G20.
On 8th Nov 2016, demonetization, the government’s claim-to-fame and by far their most debated initiative came into being. Clearly an ambitious move with the intent to fight corruption, the bureaucracy failed to deliver, and chaos ensued. The decision to keep the entire affair a secret led to inadequate planning and eventually, bad execution. While former Prime Minister, eminent economist and former RBI Governor Dr. Manmohan Singh called it “legalized plunder and monumental mismanagement”, Nobel laureate Dr. Amartya Sen criticized the authoritarian manner in which the reform was implemented. In a country where 85% of its workers are paid in cash, this was a major disruption. The aam aadmi bore the brunt – confused and frustrated, but all the more motivated to go on, and play his part in this gigantic war against corruption. Innovative solutions came everyday starting with cab drivers in Jaipur using point of sale transaction machines as an alternate payment option. When tea estate owners in Assam ran out of cash to pay their employees, the Government of Assam instructed them to open bank accounts for all their employees and ensure timely payment of weekly wages. In remote villages of Mizoram, shopkeepers began the trend of “I owe you” chits essentially replacing money with paper to immediately combat the cash crunch. Such is the ethos of this country. As a concept, demonetization is not entirely new to India. On 11th Jan 1946, near the end of British rule, all high denomination notes were rendered illegal to tackle black money and tax evasion. Similarly, the Janata Party coalition, on 16th Jan 1978 scrapped Rs.1000, 5000 & 10,000 notes. As of Feb 2017, however, a complete reversal to this move towards a digital economy was seen. Transactions at PoS terminals reduced by 28% and mobile banking also went down by 20%. Basically, on re-monetization, people reverted to cash which has always been the preferred mode of payment in India. This is where the lack of education played its part. Before making such paradigm shifts, it’s almost indispensable to educate people why they should go digital in the first place and not just take away cash for a few months only to replace it later. Lesson learnt, perhaps? According to Dr. Rajiv Kumar, Vice-Chairman NITI Aayog, however, the benefits of this move will be seen in times to come. Today 18 lakh bank accounts are under CBDT scrutiny with black money at least turning grey if not yet white, and in 15 months, more than 30 crore bank accounts were opened. Many times, countries demonetize existing notes in order to upgrade their security features and void existing counterfeit money and terror funds, and this was most likely achieved as well.
The government’s openness to foreign investment created a huge boom but the pace of introducing such reforms slowed down eventually, understandably to focus more on domestic reforms like the Goods and Services Tax (GST). Seen as one of the biggest tax reforms ever, GST, introduced on 1st Jul 2017, replaced 17 indirect cascading taxes and multiple cesses levied by the central and state governments, and seeks to introduce one-country-one-tax concept; i.e. an item will cost the same across India. As of Apr 2018, the collections from GST crossed the Rs 1 lakh crore milestone and if numbers are to be believed, it has brought greater tax compliance. Now – with much hue and cry over the 18% GST, here are some facts to consider. There are 5 major tax slabs under GST – 0%, 5%, 12%, 18% and 28%. So NO! Not everything is way more expensive. In fact, fruits and vegetables, cereals, fresh meat, salt, jaggery, fresh and pasteurized milk, paneer (unless branded), cotton (for Khadi and Gandhi topi), wool, raw or processed jute fibre, printed books, newspapers, all kinds of contraceptives (believe it or not) among many others fall under the 0% category. Another concern has been the impact of GST on small businesses and the export industry which is a major source of revenue and job creation. Point of information – small businesses can pay up to 5% GST and not file monthly returns either, while exports have been completely exempted from registering under GST. Yes, the structure is complicated and is being continuously revised to meet expectations but should that really be a point of criticism? In a continental economy like India with such economic disparity, it’s impossible to foresee all challenges prior to actual implementation if equity is the aim. What could be contested instead is the decision to exempt alcohol for human consumption along with petroleum and petroleum products from this tax!
If the by-elections are any indicators of what the NDA awaits in the upcoming general elections, strengthening the economy at this crucial juncture could work wonders. The rupee is at an all-time low and fuel prices are soaring; and let’s not forget that a depreciating rupee means an increase in prices of goods and services (with the festive season right around the corner). The government on 14th Sep, 2018 announced a 5-point strategy to check the rupee fall and prevent further increase of the current account deficit; and the upcoming days will witness attempts to ease overseas borrowing regulations, reduce imports of non-essential commodities and boost exports, and provide tax benefits on Masala bonds. Time will tell how successful they are, and whether the twin deficits will once again balloon out of control before the end of this administration’s term and be their Achilles’ heel.